Inflation

Inflation

Spooked by the stock market? Here’s the answer

Posted By |

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Most investors do not like volatility. They do not like looking at their investment account balance observing that they’ve ‘lost money.’

Of course, you have not lost money until you buy an asset at a certain price and then sell at a lower price. You’ve then just realized your losses. You have not lost money when your portfolio value goes down. And in fact, swings in portfolio values are just par for the course. Stocks and bonds and real estate change in price (with wild swings at times) in regular fashion: it’s normal behaviour. If the stock markets have you spooked, there is a simple and timeless plan of action.

With this strategy, you can ‘win’ if stocks go up. You can win if stocks go down. It’s a strategy that worked during the worst period in stock market history: the Great Depression of the 1930s .

The answer of course is adding money on a regular schedule. In the investment world they call it dollar cost averaging; we can abbreviate that to DCA. There is no need to guess about which way the market is going to go today, next week, next month, next year, or even the next five years. We simply expect or hope that the markets will go up over longer periods, as they have throughout history.

Stock market history

U.S. stocks, S&P 500

You can see that there is lots of green on the board. Stocks mostly go up. It is those pink years (on the table) that usually trip up many investors

The key to long-term wealth building is being able to invest through those down years. And in fact, adding money in those years is quite beneficial as the stocks go on sale.

But keep in mind that stocks can stay under water for extended periods.

Dollar cost averaging

Now this is a consideration for those who have very little exposure to stocks, or who have been out of the markets for quite some time. That event is not as rare as you might think. Many investors have left the markets, though they recognize that they need to be invested to reach their financial goals and enjoy a prosperous retirement. They also want their wealth protected from inflation.

Here’s the demonstration: investing through the initial stages of the Great Depression.

In the above charts we see equal amounts invested, but the dollar cost averaging strategy still delivered positive returns in a vicious bear market. Buying at those lower prices was very beneficial. Now keep in mind for the above to work, the markets have to go up over time. They have to recover. And historically they have.

Time reduces risk

Here is a wonderful graphic that demonstrates the returns over various periods. Our odds increase as we lengthen the time period that we remain invested.

And a table that frames the probabilities of positive returns.

Charlie Bilello

Spread out that lump sum

If you are sitting on a large sum that you want to get invested you will have to have a plan. Over what time period should you get those monies into the market?

If you start investing and the markets keep going up, great. Mission accomplished. The money you’ve invested has increased in value. You are collecting dividends along the way.

But of course when we enter a stock market correction, your total portfolio value will decline. Though you might get enough of a head start so that your money invested remains in positive territory.

At that point when markets are declining, remember that lower prices are good. The stocks are going on sale. And of course, you do not have to invest in an all-equity portfolio. You can dollar cost average into a balanced portfolio.

I’d suggest that you spread the money out over 2 or 3 years. For example, If you are on the 2-year plan and have $100,000 to invest and you’re investing every month, you’d invest $4,167 per month.

You can’t time the markets

For those who already have substantial assets invested, you can’t move in and out of the markets. We don’t know when the corrections will occur. The most reasonable course of actions is still dollar cost averaging. That said, whenever you have money to invest, stock market history says get it invested. The sooner the better.

From My Own Advisor here ‘s – Dollar cost averaging vs lump sum investing.

Invest within your risk tolerance level

This is key. If you get scared and sell, you might lose money.

You might have to accept a lower-risk portfolio that is likely to earn less over time compared to a more aggressive stock-heavy portfolio or balanced portfolio. It’s also possible that you do not have the risk tolerance to invest (at all), even in a very conservative ETF portfolio. If that is the case you would have to stick with GICs and high-interest savings accounts. You might add to your real estate exposure for growth. In retirement, you might use annuities to boost your income.

For savings we use EQ Bank. 3-and 6-month GIC’s now 2.05%

To help gauge your risk tolerance level and the appropriate level of portfolio risk, please have a read of the core couch potato portfolios on MoneySense. You’ll find a table within that post that breaks it down.

If you are risk averse, you likely need a managed portfolio and advice. You might consider a Canadian Robo Advisor. These investment companies provide lower-fee portfolios at various risk levels. Advice is also included. A few of these firms also offer financial planning.

At Justwealth, you get access to advice and financial planning. In fact, you’ll have your own dedicated advisor.

Justwealth. The Canadian Robo Advisor that knows when to get personal.

They will do a risk evaluation to see if investing is right for you, and then you will be placed in the appropriate portfolio(s). And once again, you’ll be offered the greater financial plan as well.

Start investing

Preet [Banerjee] puts some of the above in video form [YouTube.com]. Preet also goes over how much you might market over various time frames, at different rates of return.

The key is to not be frozen on the sidelines. We might refer to that as ‘paralysis by analysis’.

Build wealth at your own comfort level, at your own pace. You will learn as you go. You can build up your comfort level for risk and volatility. It’s quite possible that you can increase your risk tolerance level over time. We develop risk callouses.

Walk before you run, perhaps.

Robo Advisors are a great training ground for investors.

Thanks for reading. We’ll see you in the comment section. If you’re not sure what to do, feel free to flip me a note.

Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site on Feb. 12, 2022 and is republished on the Hub with his permission.

Target Date Retirement ETFs

Posted By |
Image licensed by Evermore from Adobe

By Myron Genyk

Special to the Financial Independence Hub

Over the years, many close friends and family have come to me for guidance on how to become DIY (do-it-yourself) investors, and how to think about investing.

My knowledge and experience lead me to suggest that they manage a portfolio of a few low-fee, index-based ETFs, diversified by asset class and geography.  Some family members were less adept at using a computer, let alone a spreadsheet, and so, after they became available, I would suggest they invest in a low-fee asset allocation ETF.

What would almost always happen several months later is that, as savings accumulated or distributions were paid, these friends and family would ask me how they should invest this new money. We’d look at how geographical weights may have changed, as well as their stock/bond mix, and invest accordingly.  And for those in the asset allocation ETFs, there would inevitably be a discussion about transitioning to a lower risk fund.

DIY investors less comfortable with Asset Allocation

After a few years of doing this, I realized that although most of these friends and family were comfortable with the mechanics of DIY investing (opening a direct investing account, placing trades, etc.) they were much less comfortable with the asset allocation process.  I also realized that, as good a sounding board as I was to help them, there were millions of Canadians who didn’t have easy access to someone like me who they could call at any time.

Clearly, there was a looming issue.  How can someone looking to self-direct their investments, but with little training, be expected to sensibly invest for their retirement?  What would be the consequences to them if they failed to do so?  What would be the consequences for us as a society if thousands or even millions of Canadians failed to properly invest for retirement?  

What are Target Date Funds?

The vast majority of Canadians need to save and invest for retirement.  But most of these investors lack the time, interest, and expertise to construct a well-diversified and efficient portfolio with the appropriate level of risk over their entire life cycle.  Target date funds were created specifically to address this issue: they are one-ticket product solutions that help investors achieve their retirement goals. This is why target date funds are one of the most common solutions implemented in employer sponsored plans, like group RRSPs (Registered Retirement Savings Plans).

Generally, most target date funds invest in some combination of stocks, bonds, and sometimes other asset classes, like gold and other commodities, or even inflation-linked bonds.  Over time, these funds change their asset allocation, decreasing exposure to stocks and adding to bonds.  This gradually changing asset allocation is commonly referred to as a glide path.

Glide paths ideal for Retirement investing

Glide paths are ideal for retirement investing because of two basic principles.  First, in the long run, historically and theoretically in the future, stocks tend to outperform bonds – the so-called equity risk premium – which generally pays long-term equity investors higher returns than long-term bond investors in exchange for accepting greater short-term volatility (the uncertain up and down movements in returns).  Second, precisely because of the greater short-term uncertainty of stock returns relative to bond returns, older investors who are less able to withstand short-term volatility should have less exposure to stocks and more in less risky asset classes like bonds than younger investors. Continue Reading…

What investors need to understand about the Russian invasion of Ukraine

Posted By |

By Allan Small,  iA Private Wealth

Special to the Financial Independence Hub

Markets are down. The Nasdaq is in bear territory and the S&P500 is in correction territory (at the time of writing).

This is the direct result of the Russian invasion of Ukraine. Not surprisingly, investors are nervous about what will happen to their wealth. I’ve certainly been getting calls from clients unsure about what to do.

Here’s what I’ve been telling them: Don’t panic. This too shall pass. The world has weathered terrible events in the past and come out the other side. We will again.

In my 25-year career as an investment advisor, investors faced Y2K, a worldwide financial collapse, and a global pandemic. In each case, downturns were followed by rebounds and even better returns.

This is temporary and stability will return

Russia’s war against the Ukraine is wrong and creating a tragic humanitarian crisis, but in terms of the markets, investors should view it as a temporary event: because it is. Yes, markets are down – for now – but they are not going to collapse. You are not going to lose all your money. Your wealth may drop for a period of time, but once the war is over, regardless of the outcome, stability will be restored and returns will tick up, in my opinion. For those fearing a global nuclear war, then market performance won’t matter.

Uncertainty causes markets to fall. Even before Russia invaded Ukraine, the markets were experiencing volatility because the central banks in Canada and the U.S. announced they would be increasing interest rates and reducing stimulus support. Higher interest rates are the primary tool to curb inflation, which is at record highs in both countries. While this made some investors nervous, it’s important to understand that the fact the Bank of Canada and the Federal Reserve are raising interest rates means the economies in both countries are strong.

Statistics Canada’s labour report for February showed just how strong. Unemployment had fallen below pre-Covid 19 levels for the first time since the start of the pandemic, down to 5.5%.[1] The Office of the Parliamentary Budget Officer projects an economic rebound and robust performance in the second half of 2022.[2] All of this is good for the markets and those benefits will be realized once the war and geopolitical tensions end.

Energy self-sufficiency will be a positive

Energy prices are high now because demand is greater than supply. Worldwide sanctions against Russia, a major global producer of oil and natural gas, mean Canada, the U.S. and Europe are looking for other suppliers and working to become more energy self-sufficient:  a positive going forward. When the Russia-Ukraine situation becomes more stable, those prices, which are also driving up inflation, will drop, in my opinion. Continue Reading…

Markets can be scary but more importantly, they are resilient

Posted By |
LowrieFinancial.com: Canva custom creation

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Most investors understand or perhaps accept the fact that they are not able to time stock markets (sell out before they go down or buy in before they advance).

The simple rationale is that stock markets are forward looking by anticipating or “pricing in” future expectations.

While the screaming negative headlines may capture attention, stock markets are looking out to what may happen well into the future.

Timing bond markets is even harder than timing stock markets

When it comes to interest rates and inflation, my observation is that the opposite is true. Most investors seem to think they can zig or zag their bond investments ahead of interest rate changes. This is perplexing, as you can easily make the case based on evidence that trying to time bond markets is even more difficult than trying to time equity markets.

Another observation is that many investors tend to be slow to over-react. Reacting to today’s deafening headlines ignores that fact that all financial markets are extremely resilient. Whether good or bad economic news, good or bad geopolitical events, markets will work themselves out and march onto new highs, albeit sometimes punctuated by sharp and unnerving declines. Put another way, declines are temporary, whereas advances are permanent. And remember, this applies to both bond and stock markets.

It is easy to understand why we might be scared about the recent headline inflation numbers and concerned about rising interest. It is very important to keep this in context, which is what we will address today.

Interest Rates are Rising (or Falling)

With interest rates in flux, what should you do? Consider this…

Positioning for Inflation – Dimensional Fund Advisors

Also, check out DFA’s video: How to Think about Rate Increases

But as it relates to your immediate fixed income holdings we don’t recommend reacting to breaking news. A recent Dimensional Fund Advisors paper, “Considering Central Bank Influence on Yields,” helps us understand why this is so. Analyzing the relationship between U.S. Federal Reserve policies on short-term interest rates versus wider, long-term bond market rates, the authors found:

“History shows that short- and long-term rates do not move in lockstep. There have been periods when the Fed aggressively lifted the fed funds target rate — the short-term rate controlled by the central bank — while longer-term rates did not change or “stubbornly” declined.”

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on March 7, 2022 and is republished here with permission.

The TSX Composite Index: No longer a Second-Class Citizen?

Posted By |
Photo courtesy of rawpixel.com.

By Noah Solomon

Special to the Financial Independence Hub

Canadian stocks have had a very decent run since the global financial crisis of 2008. From December 31, 2008, through the end of last year, the TSX Composite Index returned an annualized 10.1%. This pales in comparison to the performance of the S&P 500 Index, which has risen at an annualized rate of 16.1%. Had you invested $1 million in the TSX Composite Index at the end of 2008, your investment would have been worth $3,477,264 at the end of last year. By comparison, the same investment in the S&P 500 Index would have a value of $6,873,269, which is a stunning $3,396,005 more than the Canadian investment.

Looking for Love in all the wrong places

The composition of the Canadian stock market is dramatically different than that of its southern neighbor. As the table below illustrates, there are a handful of sectors that feature either far more or less prominently in the TSX Composite Index than in the S&P 500. Specifically, Canadian stocks are far more concentrated in financial, energy, and materials companies, while the U.S. market is more concentrated in the technology, health care, and consumer discretionary sectors.

TSX Composite Index vs. S&P 500 Index: Sector Weights (Dec. 31, 2021)

In 1980, the song “Lookin’ for Love,” by American country music singer Johnny Lee was released on the soundtrack to the film Urban Cowboy. The tune’s iconic lyric, “Lookin’ for love in all the wrong places,” serves as a fitting description of the dramatic underperformance of the TSX vs. the S&P 500. The majority of disparity in performance between the two indexes can be explained by their different sectoral weightings. When financial, energy, and materials stocks outperform their counterparts in the information technology, health care and consumer discretionary sectors, it is highly likely that the TSX will outperform the S&P 500, and vice-versa.

Over the past two years ending December 31, 2021, the information technology sector has been the star performer both in Canada and the U.S. Interestingly, the TSX technology index fared better than its U.S. peer, returning 113.9% vs. 92.4%. However, due to the far greater weighting of tech companies in the S&P 500 than in the TSX (23.2% vs. 5.7% as of the end of 2019), tech stocks have had a far greater impact on the returns of the S&P 500 than on the TSX. On the other hand, financial, energy, and materials stocks were all underperformers on both sides of the border, which served as a drag on the performance of Canadian relative to U.S. stocks.

Macro Drivers and Tipping Points: It’s About Growth & Oil

Given that differing sector weightings account for the lion’s share of performance disparities between Canadian and U.S. stocks, it is essential to determine the macroeconomic factors that have historically caused certain sectors to out/underperform others, and by extension TSX outperformance or underperformance. Continue Reading…